Introduction
Reclassification of promoters refers to the process in which the individuals or entities holding substantial shares in a Company or control over the Company, classified as "Promoters", are re-designated as "Public Shareholders". This process is significant in corporate governance, particularly when a company's ownership or control structure changes. The procedure ensures transparency, compliance with regulatory frameworks, and the maintenance of a fair and equitable market for all shareholders.
Promoters typically hold a significant shareholding in the company and exert substantial influence over its operations and decision-making processes. However, in certain circumstances such as changes in control, reduction in holdings, or a shift in management responsibilities, these promoters may wish to be reclassified as public shareholders. This is common in the context of regulatory compliance, especially under the norms set by the Securities and Exchange Board of India ("SEBI").
The SEBI (Listing Obligations and Disclosures Requirements) Regulations, 2015 ("SEBI LODR"), lay down the rules and procedures for reclassifying promoters, ensuring that the process is transparent and that the integrity of the market is maintained.
Definitions
- Promoter: "Promoter" shall include a person:
- Who has been named as such in a draft offer document or offer document or is identified by the issuer in the annual return referred to in Section 92 of the Companies Act, 2013; or
- Who has control over the affairs of the issuer, directly or indirectly whether as a Shareholder, Director or otherwise; or
- In accordance with whose advice, directors or instructions the Board of Directors of the issuer is accustomed to act:
Provided that nothing in sub-clause (iii) shall apply to a person who is acting merely in a professional capacity;
Provided further that a Financial Institution, Scheduled Commercial Bank, (Foreign Portfolio Investor other than Individual, Corporate Bodies and Family Offices), Mutual Fund, Ventur Capital Fund, Alternative Investment Fund, Foreign Venture Capital Investor, Insurance Company registered with the Insurance Regulatory and Development Authority of India or any other category as specified by the Board from time to time, shall not be deemed to be a promoter merely by virtue of the fact that twenty percent or more of the equity share capital of the issuer is held by such person unless such person satisfy other requirements prescribed under these regulations.
- Promoter Group: "Promoter Group" includes:
- the Promoter;
- an immediate relative of the promoter (i.e. any spouse of that person, or any parent, brother, sister or child of the person or of the spouse); and
- in case the promoter is a Body Corporate:
- A Subsidiary or Holding Company of such Body Corporate;
- Any Body Corporate in which the promoter holds twenty percent or more of the equity share capital and/or any Body Corporate which holds twenty percent or more of the equity share capital of the promoter
- in case the promoter is an individual:
- Any Body Corporate in which twenty percent or more of the equity share capital is held by the promoter or an immediate relative of the promoter or a firm or Hindu Undivided Family in which the promoter or any one or more of their relative is a member;
- Any Body Corporate in which a body corporate as provided in (a) above holds twenty percent or more of the equity share capital; and
- Any Hindu Undivided Family or Firm in which the aggregate share of the promoter and their relatives is equal to or more than twenty percent of the total capital;
- All persons whose shareholding is aggregated under the heading "shareholding of the promoter group":
Provided that a Financial Institution, Scheduled Bank, (Foreign Portfolio Investor other than Individuals, Corporate Bodies and Family Offices), Mutual Fund, Venture Capital Fund, Alternative Investment Fund, Foreign Venture Capital Investor, Insurance Company registered with the Insurance Regulatory and Development Authority of India or any other category as specified by the Board from time to time, shall not be deemed to be promoter group merely by virtue of the fact that twenty percent or more of the equity share capital of the promoter is held by such person or entity:
Provided further that such Financial Institution, Scheduled Bank, (Foreign Portfolio Investor other than Individuals, Corporate Bodies and Family Offices), Mutual Fund, Venture Capital Fund, Alternative Investment Fund and Foreign Venture Capital Investor Insurance Company registered with the Insurance Regulatory and Development Authority of India or any other category as specified by the Board from time to time shall be treated as promoter group for the subsidiaries or companies promoted by them or for the mutual fund sponsored by them.
Procedure for Reclassification by Promoter
Request for Reclassification by Promoter(s)
The promoters seeking reclassification shall file an application to listed company. This request should include:
- A rationale for the reclassification, explaining why they wish to move from the promoter category to public category.
- A description of how the conditions specified in Clause (b) of Sub-Regulation 3 of the SEBI LODR are met. This includes satisfying the following key conditions that the promoter(s) and the person related to them shall not:
- hold more than 10% of the total voting rights in the listed entity;
- exercise control over the affairs of the company, either directly or indirectly;
- have any special rights regarding the company (e.g., through shareholder agreements);
- involved in the management, board representation, or key managerial positions;
- be a wilful defaulter as per RBI guidelines; and
- be a fugitive economic offender.
Board of Directors' Review
Upon receiving the request, the Board of Directors of the listed entity will analyse the request and ensure compliance with the conditions set out in clause (b) of Sub-Regulation 3 as provided above.
The Board must discuss and provide their views on the request at the immediate next board meeting, or within two months of receiving the request from its promoters, whichever is earlier.
Application for No-Objection to Stock Exchanges
Following the board's review, the listed entity must submit an application to the recognized stock exchange(s) seeking a no-objection for the reclassification request.
The application should be submitted within five days of the board's consideration of the request, and it must include the views of the board.
Stock Exchange's Decision
The stock exchange will review the application and decide within 30 days, excluding any time taken by the listed entity to respond to queries. If the Company is listed on multiple stock exchanges, these exchanges will jointly decide on the application.
Shareholder Approval
After obtaining the No Objection Letter from the stock exchange(s), the listed entity must place the reclassification request before its shareholders for approval in a General Meeting.
- A General Meeting shall take place within 60 days of receiving the No Objection Letter.
- The approval shall be obtained by passing an Ordinary Resolution.
NOTE: Promoter(s) and their related persons cannot vote on this resolution, except in cases where they do not hold more than 1% of the total voting rights, or the reclassification is due to a divorce.
Notification to Stock Exchanges
After Shareholder approval, the listed entity must notify the Stock Exchange within 5 (Five) days.
- The Company must also effect the reclassification once it has received shareholders' approval.
- If any changes occur in the facts or circumstances of the case after receiving the No-Objection from the exchanges, the company must seek re-approval from the Stock Exchange.
Obligation for listed entity
The listed entity shall fulfil the following conditions:
- be compliant with the requirement for minimum public shareholding as required under regulation 38 of these regulations;
- not have trading in its shares suspended by the stock exchanges;
- not have any outstanding dues to the Board, the stock exchanges or the depositories.
Conditions for Promoter(s) after Reclassification
Once reclassified as public, the promoter(s) must continue to comply with certain conditions:
- They must not hold more than 10% of the total voting rights.
- They must not exercise control over the company or have any special rights (as specified in Clause (b) of Sub-Regulation 3).
- They must continue to comply with the requirements for three years following reclassification (conditions include not being involved in the company's management or board and not acting as key managerial personnel).
If the promoter fails to comply with these conditions, they will be automatically reclassified as a promoter.
Material Event Disclosures
The Listed entity must disclose the following events as material events to the Stock Exchange:
- Receipt of the reclassification request.
- Outcome of the Board Meeting and views on the request.
- Submission of the application for No-Objection to the Stock Exchange for reclassification of status as public.
- The decision made by the Stock Exchanges regarding the request.
- The outcome of the shareholders' approval for reclassification.
These disclosures must be made within 24 hours of the event occurring.
Exceptions to the Process
Exemption in case of Insolvency
The provisions for reclassification may not apply if the reclassification is due to a resolution plan approved under the Insolvency and Bankruptcy Code or as a result of a regulator's order.
- In such cases, the promoter must not remain in control of the listed entity
- The listed entity must disclose the resolution plan or regulator's order within 24 hours.
Reclassification via Open Offer or Scheme of Arrangement
The reclassification provisions may also be relaxed if the reclassification occurs through an open offer or a scheme of arrangement.
- In this case, the intent of the reclassification must be disclosed in the letter of offer or the scheme document.
Reclassification of Public Shareholders as Promoters
If any public shareholders wish to be reclassified as a promoters, they must make an open offer in accordance with the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 and the intention to get reclassified as a promoter shall be disclosed in the letter of offer.
Transmission, Succession, or Gift of Shares
In cases of transmission, succession, inheritance, or gift of shares:
- The recipient of the shares will immediately be classified as a promoter or promoter group member.
- If the recipient wishes to seek reclassification as a public shareholder, they may do so, subject to compliance with the conditions mentioned in Sub-Regulation 3.
If a promoter dies, they will automatically cease to be a promoter or a member of the promoter group.
CONCLUSION
The reclassification of promoters is a process that involves several key steps, including submitting a request, obtaining approval from the board of directors and shareholders, securing no-objection from the stock exchanges, and ensuring compliance with specific regulatory conditions. It ensures that the transition from being a promoter to a public shareholder is done transparently and in accordance with market regulations.
Listed entities must carefully follow the regulatory framework outlined by SEBI to ensure that the reclassification is valid and compliant with all relevant conditions.
Disclaimer: This article provides general information existing at the time of preparation and we take no responsibility to update it with the subsequent changes in the law. The article is intended as a news update and Affluence Advisory neither assumes nor accepts any responsibility for any loss arising to any person acting or refraining from acting as a result of any material contained in this article. It is recommended that professional advice be taken based on specific facts and circumstances. This article does not substitute the need to refer to the original pronouncement.
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